International GAAP 2016: Generally Accepted Accounting Principles under International Financial Reporting Standards

By Ernst & Young LLP

IFRSs, the standards set by the International Accounting Standards Board (IASB), are complex and sometimes obscure. Understanding their implications and applying them appropriately requires something special; and that is why International GAAP 2016 is the essential tool for anyone applying, auditing, interpreting, regulating, studying and teaching international financial reporting. It provides expert interpretation and practical guidance for busy professionals, and includes, in every chapter, detailed analysis of how complex financial reporting problems can be resolved appropriately and effectively. The International Financial Reporting Group of Ernst & Young includes financial reporting specialists from throughout the world. Complex technical accounting issues are explained clearly in a practical working context that enables immediate understanding of the point at issue.

International GAAP 2016 is the only globally focused work on IFRSs. It is not constrained by any individual country's legislation or financial reporting regulations, and it ensures an international consistency of approach unavailable elsewhere. It shows how difficult practical issues should be approached in the complex, global world of international financial reporting, where IFRSs have become the accepted financial reporting system in more than 100 countries. This integrated approach provides a unique level of authoritative material for anyone involved in preparing, interpreting or auditing company accounts, for regulators, academic researchers and for all students of accountancy.

All aspects of the detailed requirements of IFRS are dealt with on a topic-by-topic basis. Each chapter of International GAAP 2016 deals with a key area of IFRS and has a common structure for ease of use:

• An introduction to the background issues

• An explanation of relevant principles

• A clear exposition of the requirements of IFRS

• A discussion of the implications in practice and possible alternative solutions available

• Worked examples

• Extracts from real company accounts

• A full listing of the required disclosures

• Language: English
• Publisher: Wiley
• Release date: Dec 21, 2015
• ISBN: 9781119180470

Book preview

Volume 1: Chapters 1 to 20

Chapter 1 International GAAP

1 Why International Financial Reporting Standards matter

2 The IFRS Foundation and the IASB

2.1 The Standard-Setting Structure

2.2 The IFRS Foundation

2.3 The Monitoring Board

2.4 The International Accounting Standards Board (IASB)

2.5 The IFRS Interpretations Committee (the Interpretations Committee)

2.6 The IASB’s and IFRS Interpretations Committee’s Due Process Handbook

2.7 The IFRS Advisory Council (the Advisory Council)

2.8 Accounting Standards Advisory Forum (ASAF)

2.9 Other Advisory Bodies

3 The IASB’s Technical Agenda and Convergence with US GAAP

3.1 The IASB’s Current Priorities and Future Agenda

3.2 IFRS/US GAAP Convergence

4 The Adoption of IFRS Around the World

4.1 Worldwide Adoption

4.2 Europe

4.2.1 EU

4.2.2 Russia

4.3 Americas

4.3.1 US

4.3.2 Canada

4.3.3 Brazil

4.4 Asia

4.4.1 China

4.4.1.A Mainland China

4.4.1.B Hong Kong

4.4.2 Japan

4.4.3 India

4.5 Australia

4.6 Africa – South Africa

5 Consistency in Application of IFRS

6 Summary

Chapter 1 International GAAP

1 Why International Financial Reporting Standards Matter

With globalisation has come the increasing integration of world markets for goods, services and capital – with the result that companies that traditionally were reliant on their domestic capital markets for financing now have substantially increased access to debt and equity capital, both inside and outside their national borders.

Yet – perhaps not entirely surprisingly – the world of financial reporting was slow to respond reflecting, no doubt, a widespread nationalism in respect of countries’ own standards.

Undoubtedly, one of the main advantages of a single set of global accounting standards is that it would enable the international capital markets to assess and compare inter-company performance in a much more meaningful, effective and efficient way. This should increase companies’ access to global capital and ultimately reduce the cost thereof. Thus the request for global standards came both from regulatory bodies and from preparers of financial statements. As early as 1989 the International Organisation of Securities Commissions (IOSCO), the world’s primary forum for co-operation among securities regulators, prepared a paper noting that cross border security offerings would be facilitated by the development of internationally accepted standards. For preparers, greater comparability in financial reporting with their global peers had obvious attractions.

Notwithstanding these anticipated benefits, it has only been since 2000 that there has been a serious effort made toward such global standards. This came about largely as a result of the European Commission’s announcement in June 2000 that it would present proposals to introduce the requirement that all listed European Union (EU) companies report in accordance with International Accounting Standards by 2005. This requirement not only changed the face of European financial reporting, but global reporting as well after many other countries followed Europe’s lead. Indeed, the IFRS Foundation reports that 116 jurisdictions require International Financial Reporting Standards (IFRS) for ‘all or most public companies’.¹

Thus global financial reporting has ceased to be characterised by numerous disparate national systems to the point at which there are today essentially only two – IFRS and US GAAP.

2 The IFRS Foundation and the IASB

2.1 The Standard-Setting Structure

The diagram below illustrates the structure within which standards are set by the International Accounting Standards Board (IASB).

ch01-01

The various elements of the structure are discussed further below.

Unless indicated otherwise, references to IFRS include the following:

International Financial Reporting Standards – standards developed by the IASB;

International Accounting Standards (IAS) – standards developed by the International Accounting Standards Committee (IASC), the predecessor to the IASB;

Interpretations developed by the IFRS Interpretations Committee (Interpretations Committee) or its predecessor, the Standing Interpretations Committee (SIC); and

International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs) – a stand-alone standard for general purpose financial statements of small and medium-sized entities (as defined).

2.2 The IFRS Foundation

The governance of the IFRS Foundation primarily rests with the Trustees of the IFRS Foundation (Trustees) who, in turn, act under the terms of the IFRS Foundation Constitution (the Constitution).² It is a requirement of the Constitution that, in order to ensure a broad international basis, there must be:³

six Trustees appointed from the Asia/Oceania region;

six Trustees appointed from Europe;

six Trustees appointed from North America;

one Trustee appointed from Africa;

one Trustee appointed from South America; and

two Trustees appointed from any area, subject to maintaining overall geographical balance.

The appointment of Trustees to fill vacancies caused by routine retirement or other reasons is the responsibility of the remaining Trustees but subject to the approval of the Monitoring Board as discussed in 2.3 below. The appointment of the Trustees is normally for a term of three years, renewable once.⁴

The Constitution requires that the Trustees should comprise individuals that, as a group, provide an appropriate balance of professional backgrounds, including auditors, preparers, users, academics, and officials serving the public interest. Two of the Trustees will normally be senior partners of prominent international accounting firms. To achieve such a balance, Trustees are selected after consultation with national and international organisations of auditors (including the International Federation of Accountants), preparers, users and academics. The Trustees are required to establish procedures for inviting suggestions for appointments from these relevant organisations, including advertising vacant positions, and for allowing individuals to put forward their own names.⁵

The Constitution provides that ‘all Trustees shall be required to show a firm commitment to the IFRS Foundation and the IASB as a high-quality global standard-setter, to be financially knowledgeable, and to have an ability to meet the time commitment. Each Trustee shall have an understanding of, and be sensitive to the challenges associated with the adoption and application of high-quality global accounting standards developed for use in the world’s capital markets and by other users.’⁶

The Trustees are responsible also for appointing the members of the IASB, Interpretations Committee, IFRS Advisory Council (the Advisory Council)⁷ and the Accounting Standards Advisory Forum (ASAF)⁸. In addition, their duties include the following:⁹

appointing the Executive Director, in consultation with the IASB Chair, and establishing his or her contract of service and performance criteria;

assuming responsibility for establishing and maintaining appropriate financing arrangements;

reviewing annually the strategy of the IFRS Foundation and the IASB and their effectiveness, including consideration, but not determination, of the IASB’s agenda;

approving annually the budget of the IFRS Foundation and determining the basis for funding;

reviewing broad strategic issues affecting financial reporting standards, promoting the IFRS Foundation and its work and promoting the objective of rigorous application of IFRS (the Trustees are, however, excluded from involvement in technical matters relating to accounting standards);

establishing and amending operating procedures, consultative arrangements and due process for the IASB, the Interpretations Committee and the Advisory Council;

approving amendments to the Constitution after following a due process, including consultation with the Advisory Council and publication of an exposure draft for public comment;

exercising all powers of the IFRS Foundation except for those expressly reserved to the IASB, the Interpretations Committee and the Advisory Council; and

publishing an annual report on the IFRS Foundation’s activities, including audited financial statements and priorities for the coming year.

The IFRS Foundation’s funding is derived primarily from national funding regimes based on a country’s gross domestic product. Most countries have established either a levy on companies, or an element of publicly supported financing. The IFRS Foundation also receives contributions from the international accounting firms.¹⁰ In 2014, the major funders of the IFRS Foundation were the international accounting firms, the European Commission, China, Japan and the US.¹¹

Section 17 of the Constitution requires a review, every five years, of the structure and effectiveness of the IFRS Foundation. The current review commenced in July 2015, with a closing date for comments of 30 November 2015.

2.3 The Monitoring Board

The Monitoring Board was created to address a perceived lack of accountability and responsiveness by the IASB and the IFRS Foundation to the concerns of its constituents.

The Monitoring Board provides a formal link between the Trustees and public authorities. This relationship seeks to replicate, on an international basis, the link between accounting standard-setters and those public authorities that have generally overseen accounting standard-setters.¹²

The Charter of the Monitoring Board notes that the Monitoring Board’s mission is:¹³

To cooperate to promote the continued development of IFRS as a high quality set of global accounting standards.

To monitor and reinforce the public interest oversight function of the IFRS Foundation, while preserving the independence of the IASB. In that regard;

to participate in the selection and approval of the Trustee appointments;

to advise the Trustees with respect to the fulfilment of their responsibilities, in particular with respect to regulatory, legal and policy developments that are pertinent to the IFRS Foundation’s oversight of the IASB and appropriate sources of IFRS Foundation funding; and

to discuss issues and share views relating to IFRS, as well as regulatory and market developments affecting the development and functioning of these standards.

The responsibilities of the Monitoring Board are to:¹⁴

participate in the process for appointing Trustees and approve the appointment of Trustees;

review and provide advice to the Trustees on the fulfilment of their responsibilities – there is an obligation on the Trustees to report annually to the Monitoring Board; and

meet with the Trustees or a sub-group thereof at least annually; the Monitoring Board has the authority to request meetings with the Trustees or separately with the chair of the Trustees and with the chair of the IASB to discuss any area of the work of the Trustees or the IASB.

At the time of writing, the Monitoring Board comprises:¹⁵

the commissioner for Financial Stability, Financial Services and Capital Markets Union of the European Commission;

a representative of the IOSCO Growth and Emerging Markets Committee;

the chair of the IOSCO board;

the commissioner of the Japan Financial Services Agency;

the vice minister for International Affairs of the Japan Financial Services Agency;

the chair of the US SEC;

the chair of the Brazilian Securities Commission;

the chair of the Financial Services Commission, Republic of Korea; and

an observer from the Basel Committee on Banking Supervision.

Membership of the Monitoring Board is assessed based on the following criteria:¹⁶

the member must be a capital market authority responsible for setting the form and content of financial reporting in its jurisdiction;

the jurisdiction has made a clear commitment to moving towards application of IFRS and promoting global acceptance of a single set of high-quality international accounting standards;

the IFRSs to be applied should be essentially aligned with IFRSs developed by the IASB;

the jurisdiction can be regarded as a major market for capital-raising in the global context;

the jurisdiction makes financial contributions to setting IFRS;

the jurisdiction has a robust enforcement mechanism to ensure proper implementation of relevant accounting standards; and

the relevant national or regional standard-setting body is committed to contribute actively to the development of IFRS.

Historically the motivation for the use of IFRS was to facilitate cross-border capital raising and, therefore, the membership of the Monitoring Board was focused on capital markets authorities that were committed to the development of high-quality global accounting standards. While this continues to be a criterion for membership, beginning with the 2016 review of its members, the Monitoring Board will evaluate the integration of IFRS for domestic issuers in that member’s jurisdiction.¹⁷

2.4 The International Accounting Standards Board (IASB)

The members of the IASB are appointed by the Trustees.¹⁸ At the time of writing the IASB comprises 14 members, although the Constitution requires there be 16 members. The main qualifications for membership of the IASB are professional competence and practical experience.¹⁹

The Trustees are required to select IASB members so that the IASB as a group provides an appropriate mix of recent practical experience among auditors, preparers, users and academics.²⁰ Furthermore, the IASB, in consultation with the Trustees, is expected to establish and maintain liaison with national standard-setters and other official bodies concerned with standard-setting to assist in the development of IFRS and to promote the convergence of national accounting standards and IFRS.²¹

The IASB will normally be required to comprise:²²

four members from Asia/Oceania;

four members from Europe;

four members from North America;

one member from Africa;

one member from South America; and

two members appointed from any area, subject to maintaining overall geographical balance.

The responsibilities of the IASB are listed in Section 37 of the Constitution. Its primary role is to have complete responsibility for all IASB technical matters including preparing and issuing IFRSs (other than interpretations) and exposure drafts, each of which is required to include any dissenting opinions; and final approval of and issuing interpretations developed by the Interpretations Committee.²³

Approval by at least nine members of the IASB is required for the publication of an exposure draft and IFRS (which includes final interpretations of the Interpretations Committee), if there are fewer than 16 members of the IASB. If there are 16 members, approval is required by at least 10 members.²⁴ Other decisions of the IASB, including the publication of a discussion paper, require a simple majority of the members present at a meeting that is attended by at least 60% of the members.²⁵ The IASB has full discretion over its technical agenda and over project assignments on technical matters. It must, however, consult the Trustees on its agenda, and the Advisory Council on major projects, agenda decisions and work priorities. In addition, the IASB is required to carry out public consultation every three years in developing its technical agenda.²⁶ The current agenda consultation commenced in August 2015, with a closing date for comments of 31 December 2015.

The IASB meets monthly, except in August. These meetings are open to the public and meeting materials are available on the IASB’s website.

2.5 The IFRS Interpretations Committee (the Interpretations Committee)

For IFRS to be truly global standards, consistent application and interpretation is required. The Interpretations Committee’s mandate is to review on a timely basis implementation issues arising in current IFRS and to provide authoritative guidance (IFRICs) on those issues.²⁷

The objectives of the Interpretations Committee are to interpret the application of IFRS, provide timely guidance on financial reporting issues that are not specifically addressed in IFRS and undertake other tasks at the request of the IASB.²⁸

The national accounting standard-setting bodies and regional bodies involved with accounting standard-setting are normally consulted on issues referred to the Interpretations Committee.²⁹ The Interpretations Committee is expected to address issues:³⁰

‘(a) that have widespread effect and have, or are expected to have, a material effect on those affected;

(b) where financial reporting would be improved through the elimination, or reduction, of diverse reporting methods; and

(c) that can be resolved efficiently within the confines of existing IFRSs and the Conceptual Framework for Financial Reporting.’

In addition to developing interpretations, the Interpretations Committee develops minor or narrow scope amendments, including Annual Improvements. The ‘Annual Improvements Process’ is designed to deal with ‘non-urgent, minor amendments to IFRSs’. Issues dealt with in this process arise from matters raised by the Interpretations Committee and suggestions from IASB staff or practitioners, and focus on areas of inconsistency in IFRS or where clarification of wording is required.

The premise behind the Annual Improvements Process is to streamline the IASB’s standard-setting process. If a number of minor amendments are processed together, there will be benefits both to constituents and the IASB. The Interpretations Committee assists the IASB by reviewing and recommending potential amendments to IFRS. ‘Annual Improvements’ is on the IASB’s work plan like its other projects and is subject to the same due process.

If the Interpretations Committee does not plan to add an item to its work programme it publishes a tentative rejection notice in the IFRIC Update and on the IFRS Foundation website and requests comments on the matter. The comment period for rejection notices is normally at least 60 days. After considering comments received, the Interpretations Committee will either confirm its decision and issue a rejection notice, add the issue to its work programme or refer the matter to the IASB. Rejection notices do not have the authority of IFRSs and, therefore, do not provide mandatory requirements. However, they should be seen as helpful, informative and persuasive. The IASB does not ratify rejection notices.³¹

The Interpretations Committee has 14 voting members. The chair, who is appointed by the Trustees, is a member of the IASB, the Director of Technical Activities or other appropriately qualified individual. The chair does not have the right to vote. The Trustees may appoint representatives of regulatory organisations, who have the right to attend and speak at meetings but not the right to vote.³² Currently, the European Commission and IOSCO have observer status. The quorum for a meeting is 10 members,³³ and approval of draft or final interpretations requires that not more than four voting members vote against the draft or final interpretation.³⁴

The Interpretations Committee meets six times a year. All technical decisions are taken at sessions that are open to public observation. The Interpretations Committee supports the IASB in improving financial reporting through timely identification, discussion and resolution of financial reporting issues within the IFRS framework.³⁵ Although the Interpretations Committee develops interpretations, because they are part of the respective IFRSs, they must be ratified by the IASB.³⁶

2.6 The IASB’s and IFRS Interpretations Committee’s Due Process Handbook

The Trustees’ Due Process Oversight Committee (DPOC) is responsible for overseeing the due process procedures of the IASB and Interpretations Committee throughout all the development stages of a standard or an interpretation, including agenda-setting and post-implementation reviews (PIRs).³⁷

The Due Process Handbook for the IASB and IFRS Interpretations Committee (the Handbook) describes the due process requirements of the IASB and Interpretations Committee.³⁸ The requirements are built on the following principles:³⁹

transparency – the IASB conducts its standard-setting process in a transparent manner;

full and fair consultation – considering the perspectives of those affected by IFRS globally; and

accountability – the IASB analyses the potential effects of its proposals on affected parties and explains the rationale for why it made the decisions it reached in developing or changing a standard.

In order to gain a wide range of views from interested parties throughout all stages of the development of IFRS, the Trustees and the IASB have established consultative procedures with the objective of ensuring that, in exercising its independent decision-making, the IASB conducts its standard-setting process in a transparent manner.⁴⁰

The Handbook specifies some minimum steps that the IASB and the Interpretations Committee are required to follow before a standard or interpretation can be issued.⁴¹ The following due process steps are mandatory:⁴²

debating any proposals in one or more public meetings;

exposing for public comment a draft of any proposed new standard, proposed amendment to a standard or proposed interpretation with minimum comment periods;

considering in a timely manner those comment letters received on the proposals;

considering whether the proposals should be exposed again;

reporting to the IFRS Advisory Council (see 2.7 below) on the technical programme, major projects, project proposals and work priorities; and

ratification of an interpretation by the IASB.

The steps specified in the Constitution that are ‘non-mandatory’ include:⁴³

publishing a discussion document (for example, a discussion paper) before an exposure draft is developed;

establishing consultative groups or other types of specialist advisory groups;

holding public hearings; and

undertaking fieldwork.

If the IASB decides not to undertake any of the non-mandatory steps, it is required to inform the DPOC of its decision and reason (known as the ‘comply or explain’ approach). Those explanations must be published in the decision summaries and in the basis for conclusions with the exposure draft or IFRS in question.⁴⁴

Although not mandatory, the IASB conducts public meetings and roundtables to ensure that it has appropriate input from its constituents.

The IASB normally allows a minimum period of 120 days for comment on an exposure draft. If the matter is narrow in scope and urgent the IASB may consider a comment period of no less than 30 days, but it will only set a period of less than 120 days after consulting, and obtaining approval from, the DPOC.⁴⁵

Under a ‘fast track’ comment process, if the matter is exceptionally urgent, and only after formally requesting and obtaining prior approval from 75% of the Trustees, ‘the IASB may reduce the period for public comment on an Exposure Draft to below 30 days but may not dispense with a comment period.’⁴⁶

2.7 The IFRS Advisory Council (the Advisory Council)

The Advisory Council (whose members are appointed by the Trustees) provides a forum for geographically and functionally diverse organisations and individuals with an interest in international financial reporting to:

provide input on the IASB’s agenda, project timetable and project priorities; and

give advice on projects, with emphasis on application and implementation issues, including matters that may warrant the attention of the Interpretations Committee.⁴⁷

A secondary objective of the Advisory Council is ‘to encourage broad participation in the development of IFRS as high-quality, globally-accepted standards.’⁴⁸

The Advisory Council comprises ‘thirty or more members, having a diversity of geographical and professional backgrounds, appointed for renewable terms of three years’. The chair of the Council is appointed by the Trustees, and may not be a member of the IASB or a member of its staff.⁴⁹ The Advisory Council normally meets at least three times a year, and its meetings are open to the public. It is required to be consulted by the IASB in advance of IASB decisions on major projects and by the Trustees in advance of any proposed changes to the Constitution.⁵⁰

Members are appointed for an initial term of three years and may be asked to remain for up to three additional years.⁵¹

2.8 Accounting Standards Advisory Forum (ASAF)

The ASAF, established in 2013, is an advisory group consisting of national accounting standard-setters and regional bodies, the purpose of which is to provide technical advice and feedback to the IASB.

The membership of the ASAF consists of 12 non-voting members (appointed by the Trustees), plus the chair, who is the IASB chair or vice-chair. To ensure a broad geographical representation, the members are from the following geographic regions:⁵²

one member from Africa;

three members from the Americas (North and South);

three members from the Asia/Oceania region;

three members from Europe (including non-EU); and

two members appointed from any area of the world at large, subject to maintaining overall geographic balance.

The ASAF meets four times a year, and its meetings are open to the public.

The objective of the ASAF is ‘to provide an advisory forum where members can constructively contribute towards the achievement of the IASB’s goal of developing globally accepted high-quality accounting standards.’ The ASAF was established to:⁵³

support the IFRS Foundation in its objectives, and contribute towards the development of a single set of high quality understandable, enforceable and globally accepted financial reporting standards;

formalise and streamline the IASB’s collective engagement with the global community of national standard setters and regional bodies in its standard setting process to ensure that a broad range of national and regional input on major technical issues related to the IASB’s standard setting activities are discussed and considered; and

facilitate effective technical discussions on standard setting issues, with representatives at a high level of professional capability and with a good knowledge of their jurisdictions.

As required by the ASAF’s Terms of Reference, the Trustees commenced a review of the ASAF in November 2014; the results were published in May 2015. The feedback, which was received from ASAF members, national standard setters and regional groups, IASB members, audit firms, academics and others, was positive, with support to continue the ASAF. Among other decisions resulting from the review, the Trustees decided to amend the Terms of Reference to, among other things, extend the term of the ASAF members to three years. The next review of the ASAF will take place in approximately three years.⁵⁴

2.9 Other Advisory Bodies

In addition to the Advisory Council and the ASAF, discussed in 2.7 and 2.8, respectively, above, the IASB has a number of other formal advisory bodies that provide input on its work and resources to consult. Meetings with the advisory bodies are held in public and meeting materials are available on the IASB’s website.⁵⁵

The IASB’s other advisory bodies are as follows:

Capital Markets Advisory Committee – provides the IASB with regular input from the international community of users of financial statements;

Emerging Economies Group – enhances the participation of emerging economies in the development of IFRSs;

Global Preparers Forum – provides the IASB with input from the international preparer community;

SME Implementation Group – supports the international adoption of the IFRS for SMEs and monitors its implementation;

IFRS Transition Resource Group for Impairment of Financial Instruments – discusses questions from stakeholders about the new impairment requirements for financial instruments;

Transition Resource Group for Revenue Recognition (TRG) – informs the IASB and the US Financial Accounting Standards Board (FASB) about potential implementation issues that could arise when entities implement the new revenue recognition standard; and

consultative groups – give the IASB access to additional practical experience and expertise; the IASB normally establishes consultative groups for its major projects.

3 The IASB’s technical agenda and Convergence with US GAAP

3.1 The IASB’s current priorities and future agenda

The IASB’s 2015 activities focused on:

Completing its deliberations on the leases project in March 2015, with a new standard expected around the end of 2015.

Continuing its work on the insurance project, with a new standard expected in 2016.

Issuing an exposure draft on the conceptual framework in May 2015.

Discussing implementation issues arising from the TRG and issuing an exposure draft of clarifications to IFRS 15 – Revenue from Contracts with Customers – in July 2015.

Discussing disclosure initiative, dynamic risk management (i.e. macro hedging) and rate-regulated activities; an exposure draft on one phase of the disclosure initiative is expected in 2015 and on a second phase sometime in 2016.

Working on a wide range of narrow-scope amendments and annual improvements to address issues identified in practice.

The IASB’s work plan as of 25 September 2015 reflects that work on a number of these projects (with the exception of leases) will continue in 2016.

The IASB began its three-year agenda consultation in August 2015, the outcome of which is expected to set the technical priorities until 2020. With comments due on 31 December 2015, it will be sometime in 2016 before those priorities will be identified.

3.2 IFRS/US GAAP Convergence

‘Convergence’ is a term used to describe the coming together of national systems of financial reporting and IFRS. Since its formation in 2001, the IASB has made great strides toward achieving global accounting convergence, with the result that the global acceptance of IFRS is rapidly becoming a reality. All listed EU companies are required to prepare their consolidated financial statements in accordance with adopted IFRSs. Elsewhere, many non-EU countries have either adopted or are in the process of adopting or are aligning their national standards with IFRS. The term ‘convergence’ is also used to refer to the efforts, since 2002, of the IASB and FASB to work to improve IFRS and US GAAP, respectively, and to achieve their convergence. In addition, the US Securities and Exchange Commission (SEC) have taken some steps towards the acceptance of IFRS in the US. In 2007, the SEC began permitting foreign private issuers to file IFRS financial statements without reconciliation to US GAAP. In 2008, the SEC set out a proposed roadmap outlining the milestones and conditions that, if met, could lead to the use of IFRS in the US by domestic registrants. In 2011, the SEC staff issued a workplan to explore the incorporation of IFRS into the US financial reporting system.

In 2013, the convergence process between the IASB and the FASB largely came to an end. One of the messages the IASB staff received from respondents to the 2011 agenda consultation was for the IASB to consider whether convergence should continue to be a priority. Ultimately, developing ‘a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards’⁵⁶ has largely superseded convergence as a significant driver of the IASB’s agenda setting process. In fact, the Handbook, which was revised in 2013, removed convergence from the list of factors that are influential in setting the agenda.

Progress was made during the decade or so of focused convergence activities, however, during which differences in accounting were minimised in many areas, notably share-based payments, segment reporting, business combinations, consolidated financial statements, fair value measurement, joint arrangements, investment entities and revenue (with the issuance of virtually identical standards in 2014). Although projects on leases, insurance and financial instruments started out as joint projects, the IASB and the FASB ultimately reached different decisions on each of them and none will be converged standards when both boards have issued their respective standards. No new convergence projects are planned.

In a speech in March 2014 dealing with the IASB’s response to the global financial crisis, Hans Hoogervorst, IASB Chair, said the following: ‘This inability to deliver compatible outcomes with the FASB clearly demonstrates the inherent instability of convergence as a means to achieve a single set of global accounting standards. For this reason, our Trustees wisely concluded that convergence can never be a substitute for adoption of IFRS.’⁵⁷

At the time of writing, the SEC has not announced a decision on the further use of IFRS in the US. However, in June 2015, James Schnurr, Chief Accountant of the SEC, reported the SEC staff had recently heard from a number of different constituents about their views on IFRS in the US. He said they ‘…heard three key themes through those discussions:

There is virtually no support to have the SEC mandate IFRS for all registrants.

There is little support for the SEC to provide an option allowing domestic registrants to prepare their financial statements under IFRS.

There is continued support for the objective of a single set of high-quality, globally accepted accounting standards.’

Consequently, he went on to say ‘[i]n my opinion, in the near term, FASB and IASB should continue to focus on converging the standards. The boards should renew their commitment to cooperate and develop standards that eliminate differences between IFRS and U.S. GAAP whenever it meets the needs of its constituents and improves the quality of financial reporting’.⁵⁸

We continue to support a single set of high-quality global accounting standards that are consistently applied. We acknowledge the significant challenges in achieving this aspirational goal. The past 10 years or so have presented many challenges. However, our reservations about the practicality do not negate the need to continue to work toward the goal of a single set of high-quality accounting standards globally. The capital markets, investors and other users of financial information would benefit from continued progress toward the ultimate goal.

4 The Adoption of IFRS Around the World

4.1 Worldwide Adoption

Since 2001, there has been a tremendous increase in the adoption of IFRS around the world. The precise way in which this has happened has varied among jurisdictions. This section sets out a brief description of how a number of key jurisdictions in each continent have approached the adoption. Some have adopted full IFRS, i.e. IFRS as issued by the IASB. Other jurisdictions have converged, or have a plan to converge, their standards with IFRS.

An entity is required to apply IFRS 1 – First-time Adoption of International Financial Reporting Standards – when it first asserts compliance with IFRS. The IASB has, therefore, established unambiguously the principle that full application of its standards and related interpretations is necessary for an entity to be able to assert that its financial statements comply with IFRS (as issued by the IASB). Consequently, it is necessary for countries that align their national standards with IFRS to require the application of IFRS 1 so that entities reporting under those standards can assert compliance with IFRS. In addition, an entity that applies IFRS as amended by a local authority cannot assert compliance with IFRS.

The following table summarises IFRS adoption (generally for consolidated financial statements) in countries with domestic market capitalisation exceeding US$500 billion as at 30 June 2015. For further details on selected countries/regions, see 4.2 to 4.6 below. In addition, the IFRS Foundation is developing profiles of application of IFRS. At the time of writing, profiles for 140 jurisdictions have been completed and are available on the IASB’s website.

4.2 Europe

4.2.1 EU

In July 2002, the European Parliament adopted Regulation No. 1606/2002 (the Regulation), which required publicly traded EU incorporated companies⁵⁹ to prepare, by 2005 at the latest, their consolidated financial statements under IFRS ‘adopted’ (as discussed further below) for application within the EU.

Although an EU regulation has direct effect on companies, without the need for national legislation, the Regulation provides an option for EU member states to permit or require the application of adopted IFRS in the preparation of annual unconsolidated financial statements and to permit or require the application of adopted IFRS by unlisted companies. This means that EU member states can require the uniform application of adopted IFRS by important sectors, such as banking or insurance, regardless of whether or not companies are listed. An analysis of the implementation of the Regulation published in 2012 shows that nearly all EU member states use the option to permit the application of adopted IFRS in the consolidated accounts of some or all types of unlisted companies. More than half of the EU member states also permit the application of adopted IFRS in the annual financial statements of some or all types of unlisted companies.⁶⁰

The Regulation established the basic rules for the creation of an endorsement mechanism for the adoption of IFRS, the timetable for implementation and a review clause to permit an assessment of the overall approach proposed. The European Commission took the view that an endorsement mechanism was needed to provide the necessary public oversight. The European Commission considered also that it was not appropriate, politically or legally, to delegate accounting standard-setting unconditionally and irrevocably to a private organisation over which the European Commission had no influence. In addition, the endorsement mechanism is responsible for examining whether the standards adopted by the IASB satisfy relevant EU public policy criteria.

The role of the endorsement mechanism is not to reformulate or replace IFRS, but to oversee the adoption of new standards and interpretations, intervening only when they contain material deficiencies or have failed to cater for features specific to the EU economic or legal environments. The central task of this mechanism is to confirm that IFRS provides a suitable basis for financial reporting by listed EU companies. The mechanism is based on a two-tier structure, combining a regulatory level with an expert level, to assist the European Commission in its endorsement role.

The recitals to the Regulation state that the endorsement mechanism should act expeditiously and also be a means to deliberate, reflect and exchange information on international accounting standards among the main parties concerned, in particular national accounting standard setters, supervisors in the fields of securities, banking and insurance, central banks including the European Central Bank (ECB), the accounting profession and users and preparers of accounts. The mechanism should be a means of fostering common understanding of adopted international accounting standards in the EU community.⁶¹

The European Commission is advised on IFRS by the European Financial Reporting Advisory Group (EFRAG). EFRAG is a private sector body established by the European organisations prominent in European capital markets, e.g. the Federation of European Accountants (FEE) and the European Banking Federation. In addition to advising the European Commission on endorsement of IFRS, EFRAG is the mechanism by which Europe as a whole can participate in the global debate on accounting standards and it coordinates European responses to IASB proposals. EFRAG plays a proactive role issuing discussion papers, field-test reports and feedback statements on outreach events. The objective of the proactive work is to involve European stakeholders at an early stage in identifying necessary improvements to financial reporting so as to influence the IASB.

In addition to EFRAG, the European Commission seeks approval from its member states through the Accounting Regulatory Committee. In 2013, a special adviser for the EU was named to develop recommendations for enhancing the EU’s role in international accounting standard-setting. As a result, the so-called Maystadt Report was published in November 2013, which included, among other things, recommended changes in the governance of EFRAG, e.g. establishing a new high-level board to approve of all EFRAG’s positions and endorsement advice letters.

The recommendations from the Maystadt Report were implemented in 2014 and resulted in a new governance structure effective from 31 October 2014. The EFRAG Board now includes, in equal numbers, representatives of European stakeholder organisations and national standard setters and will be led by the President of the EFRAG Board, who is nominated by the European Commission. The EFRAG Board is responsible for all EFRAG positions and operates on the basis of a consensus-based decision-making process with the objective of Europe speaking with one voice. The European Commission, the European supervisory authorities and the ECB participate in the EFRAG Board in an observer capacity. The EFRAG Board takes all its decisions after considering the advice of the EFRAG Technical Expert Group (EFRAG TEG) and the results of EFRAG’s due process, and after hearing from the Accounting Regulatory Committee and making all assessments deemed relevant from a political perspective. Following the implementation of the Maystadt reform in 2014, EFRAG’s activities include assessments of whether the IASB’s proposals and IFRS requirements are conducive to the European public good. This includes the interaction with economic concerns, such as financial stability and growth.

Concerns have been expressed about the EU endorsement process but to date, apart from the carve out from IAS 39 – Financial Instruments: Recognition and Measurement (refer to Chapter 47) and the intention not to endorse IFRS 14 – Regulatory Deferral Accounts,⁶² all IASB standards have ultimately been endorsed. However, there are standards and a number of Interpretations Committee interpretations that have had delayed application dates. The most notable is the effective date for IFRS 10 – Consolidated Financial Statements, IFRS 11 – Joint Arrangements, IFRS 12 – Disclosure of Interests in Other Entities, IAS 27 – Separate Financial Statements – and IAS 28 – Investments in Associates and Joint Ventures – for which the European Commission permitted a one-year deferral to the mandatory effective date set by the IASB.

In 2014, the European Commission started an evaluation of the Regulation on the application of IFRS to assess whether:

the Regulation achieved its objective in an efficient and effective manner;

the criteria that all new IFRS should meet to become EU law are appropriate and whether the process for adoption of standards works properly; and

the governance structure of the bodies developing the standards and advising the Commission is appropriate.

The evaluation mainly included a public consultation, an informal expert group, and a review of literature on the impact of the mandatory adoption of IFRS in the EU and on the performance of IFRS during the financial crisis. The results were included in a report issued on 18 June 2015. The key findings showed that IFRS was successful in creating a common accounting language for capital markets and that there is still no well-defined alternative to IFRS. The evidence from the evaluation also showed that the objectives of the Regulation remain relevant. Companies that responded to the public consultation were mostly positive about their experience of using IFRS and in most cases, benefits outweighed costs. Investors also largely supported IFRS for improving the transparency and comparability of financial statements. Most stakeholders considered that the process through which IFRS become part of EU law works well.

However, the report identifies room for improvement in some areas. Amongst others, it was noted that the coherence of standards with EU laws should continue to be assessed during standard development and endorsement. In addition, the Commission will look at whether the powers of the European supervisory authorities are sufficient and will consider measures to simplify the endorsement process. Further, the Commission suggested that the IASB strengthen its impact analysis and consider the needs of long-term investors when developing standards.

4.2.2 Russia

Since 1998, Russian Accounting Principles (RAP) have been gradually converging towards IFRS. Most of RAP is substantially based on IFRS, although some IFRSs have no comparable RAP standard and some RAP standards that are based on IFRS have not been updated for recent changes to the comparable IFRS. Statutory financial statements are required to be prepared by all legal entities in accordance with RAP.

Since 2004, the Central Bank of the Russian Federation (CBR) has required credit institutions to file financial statements prepared in accordance with IFRS as issued by the IASB. For public reporting purposes, ‘A-listed’ Russian companies were also required to prepare financial statements in accordance with IFRS or US GAAP.

In 2010 the Russian Federal Law On consolidated financial statements (the Law) introduced a legislative requirement on mandatory application of IFRS for the preparation of consolidated financial statements by certain Russian entities. Initially only credit institutions, insurance companies and listed companies were in the scope of the Law.

Amendments to the Law adopted in 2014 (2014 Law) broadened its scope by requiring non-state pension funds; management companies of investment funds, mutual funds and non-state pension funds; and clearing institutions to prepare IFRS financial statements. The 2014 Law established a right for the government to issue a regulation that will specify that certain state unitary enterprises and state-owned companies will be required to prepare financial statements in accordance with IFRS. At the time of writing, the government has not issued this regulation; initial application of IFRS will be required one year from its issuance. The 2014 Law also clarified that IFRS financial statements are required to be prepared by Russian entities that otherwise are in the scope of the Law but have no subsidiaries.

The Law also established an IFRS endorsement process in Russia. Under the Law, individual IFRSs (standards and interpretations) become mandatory starting from the effective date specified in the IFRS or from the date of its endorsement if it is later. IFRSs can be voluntarily applied after they are endorsed but before their effective date. In practice, the time period between the IASB issuing a new or amended standard and its endorsement in Russia is not significant, which allows Russian companies to early adopt IFRSs and amendments.

The IFRS endorsement process involves an analysis of the Russian language text of an IFRS, provided by the IFRS Foundation, by the National Organization for Financial Accounting and Reporting Standards Foundation (NOFA), an independent, non-commercial organisation identified by the Ministry of Finance of the Russian Federation (Ministry of Finance). NOFA performs an analysis of an individual IFRS’s suitability for the Russian financial reporting system. NOFA advises the Ministry of Finance whether an IFRS should be endorsed as issued by the IASB or whether certain requirements should be ‘carved out’ to meet the needs of the financial reporting system in Russia. The Ministry of Finance, after consultation with the CBR, makes the final decision on endorsement and publication of an IFRS.

On 25 November 2011, the Ministry of Finance endorsed, without any ‘carve outs’, all IFRSs effective from 1 January 2012. Following this endorsement, banks, insurance entities and most equity-listed companies are required to file consolidated IFRS financial statements for fiscal years ended 31 December 2012 and thereafter. The endorsement process continued and all IFRSs effective from 1 January 2015 have been endorsed by Russia as they were issued by the IASB. IFRS 9(2009) and IFRS 9(2010) were also endorsed and, therefore, may be adopted early by Russian companies. At the time of writing, IFRS 9(2014) has not been endorsed, but it is expected to be endorsed before the end of 2015.

4.3 Americas

4.3.1 US

See 3.2 above for a discussion of the status of US adoption of IFRS.

4.3.2 Canada

For Publicly accountable enterprises, the Accounting Standards Board (AcSB) adopted IFRS as Canadian GAAP for fiscal years beginning on or after 1 January 2011, with some deferrals for certain types of entities, which have now expired, and with the exception of pension plans and benefit plans that have characteristics similar to pension plans. Such plans follow the accounting standards for pension plans issued by the AcSB as of 1 January 2011, rather than IAS 26 – Accounting and Reporting by Retirement Benefit Plans.

The definition of ‘publicly accountable enterprises’ is essentially the same as ‘publicly accountable entity’ in IFRS for SMEs. Canadian publicly accountable enterprises that are registered with the US SEC are permitted to apply US accounting standards rather than IFRS. SEC registered Canadian entities operating in industries dominated by US entities tend to favour US accounting standards over IFRS. In addition, securities regulators have indicated that they will consider permitting the use of US standards by Canadian rate-regulated entities that file with Canadian securities commissions even if they are not SEC registered. A number of these entities have been granted permission to use US standards.

For non-publicly accountable enterprises and not-for-profit organisations, the AcSB has developed new bases of accounting that are derived from Canadian standards rather than IFRS, although IFRS is also available for use by those entities on a voluntary basis.

The adoption of IFRS in Canada for publicly accountable enterprises means that the AcSB has effectively ceased to make final decisions on most matters affecting the technical content and timing of implementation of standards applied to publicly accountable enterprises in Canada. The AcSB’s plans for incorporating new or amended IFRS into Canadian standards include reviewing all IASB documents issued for comment. As part of this process, the AcSB seeks the input of Canadian stakeholders by issuing its own ‘wraparound exposure draft’ of the IASB proposals, together with a document highlighting the key elements of the IASB proposals that are particularly relevant to Canadian stakeholders. In addition, the AcSB may perform outreach activities such as public roundtables. Any changes to IFRS must be approved by the AcSB before becoming part of Canadian GAAP.

While the AcSB retains the power to modify or add to the requirements of IFRS, it intends to avoid changing IFRS when adopting them as Canadian GAAP. Accordingly, the AcSB does not expect to eliminate any options within existing IFRS. As issues relevant to Canadian users of financial information arise in the future, the AcSB will work to resolve them through the Interpretations Committee or the IASB. In the event that a resolution by the Interpretations Committee or IASB is not possible, the AcSB will stand ready to develop additional temporary guidance.

The AcSB has an IFRS Discussion Group to provide a public forum to discuss the application of IFRS in Canada and to identify matters that should be forwarded to the Interpretations Committee for further consideration. The Group does not interpret IFRS or seek consensus on its application in Canada. It meets in public up to four times per year and has generated several submissions for the Interpretations Committee’s agenda.

4.3.3 Brazil

Local accounting standards in Brazil (CPCs) have been converged with IFRS since 2010 and public companies regulated by the ‘Comissão de Valores Mobiliários’ (CVM) are also required to make a formal statement of compliance with IFRS as issued by the IASB for their consolidated financial statements. The only exception is for homebuilding companies, which are temporarily permitted to continue to apply IAS 11 – Construction Contracts – rather than IAS 18 – Revenue – under IFRIC 15 – Agreements for the Construction of Real Estate.

Banks are regulated by the Brazilian Central Bank, which continues to require preparation of financial statements under its pre-existing rules. However, larger banks have also been required to prepare financial statements in accordance with IFRS since 2010, which must be made publicly available. Insurance companies were required to adopt the local CPCs, and hence IFRS, in 2011.

Non-public companies outside financial services are required to apply the CPCs. Smaller non-public companies are permitted to apply an equivalent of IFRS for SMEs.

4.4 Asia

4.4.1 China

4.4.1.A Mainland China

The Ministry of Finance in China (the MOF) – through its Accounting Regulatory Department – is responsible for the promulgation of accounting standards, which are applicable to various business enterprises.

Representatives of the China Accounting Standards Committee (CASC), which falls under the Accounting Regulatory Department of the MOF, and the IASB met in Beijing in November 2005 to discuss a range of issues relating to the convergence of Chinese accounting standards with IFRS. At the conclusion of the meeting, the two delegations released a joint statement setting out key points of agreement, including the following:

the CASC stated that convergence is one of the fundamental goals of its standard-setting programme, with the intention that an enterprise applying Chinese accounting standards should produce financial statements that are the same as those of an enterprise that applies IFRS; and

the delegation acknowledged that convergence with IFRS will take time and how to converge with IFRS is a matter for China to determine.

In February 2006, the MOF issued a series of new and revised Accounting Standards for Business Enterprises (ASBE), which included the revised Basic Standard, 22 newly-promulgated accounting standards and 16 revised accounting standards. The new and revised ASBE were effective from 1 January 2007 for listed companies. Other companies are encouraged to adopt it. In April 2010, the MOF issued the Road Map for Continual Convergence of the ASBE with IFRS (the MOF Road Map), which requires the application of ASBE by all listed companies, some non-listed financial enterprises and central state-owned enterprises, and most large and medium-sized enterprises. The MOF Road Map also states that ASBE will continue to maintain convergence with IFRS.

To maintain continuous convergence with IFRS, during the period from February 2014 to July 2014 the MOF issued eight new and revised accounting standards, covering employee benefits, business combinations, equity investment, fair value measurement, and presentation and disclosure requirements. Among these new and revised standards, seven standards were effective from 1 July 2014 with early adoption encouraged for overseas listed companies; one standard was effective for financial statements for the year ended 31 December 2014.

ASBE, to a large extent, represents convergence with IFRS, with due consideration being given to specific situations in China. ASBE covers the recognition, measurement, presentation and disclosure of most transactions and events, financial reporting, and nearly all the topics covered by current IFRS. Most of ASBE is substantially in line with the corresponding IFRS, with a more simplified form of disclosures. However, there are ASBE that do not have an IFRS equivalent, such as that on non-monetary transactions and common control business combinations, and there are certain standards that restrict or eliminate measurement alternatives that exist in IFRS. For example, the ASBE on investment property permits the use of the fair value model only when certain strict criteria are met. Whilst ASBE is not identical to IFRS, the substantive difference from IFRS is that the ASBE on impairment of assets prohibits the reversal of an impairment loss for long-lived assets in all situations.

4.4.1.B Hong Kong

The Hong Kong Institute of Certified Public Accountants (HKICPA) is the principal source of accounting principles in Hong Kong. These include a series of Hong Kong Financial Reporting Standards, accounting standards referred to as Hong Kong Accounting Standards (HKAS) and Interpretations issued by the HKICPA. The term ‘Hong Kong Financial Reporting Standards’ (HKFRS) is deemed to include all of the foregoing.

HKFRS was fully converged with IFRS (subject to the exceptions discussed below) with effect from 1 January 2005. The HKICPA Council supports the integration of its standard-setting process with that of the IASB.

Although the HKICPA Council has a policy of maintaining convergence of HKFRS with IFRS, the HKICPA Council may consider it appropriate to include additional disclosure requirements in an HKFRS or, in some exceptional cases, to deviate from an IFRS. Each HKFRS contains information about the extent of compliance with the equivalent IFRS. When the requirements of an HKFRS and an IFRS differ, the HKFRS is required to be followed by entities reporting within the area of application of HKFRS. However in practice, exceptions to IFRS are few and relate to certain transitional provisions.

4.4.2 Japan

Gradual convergence of Japanese GAAP and IFRS has been ongoing for a number of years; however, full mandatory adoption of IFRS in Japan has been put on hold for the time being.

In June 2009, the Business Advisory Council (BAC), a key advisory body to the Financial Services Agency, approved a roadmap for the adoption of IFRS in Japan. This roadmap gives the option of voluntary adoption to companies that meet certain conditions.

In June 2013, the BAC published an ‘Interim Policy Relating to IFRS’ (the Policy), which further encourages the voluntary adoption of IFRS. The Policy states that although it is not yet the right time to determine whether or not to require mandatory implementation of IFRS in Japan, the BAC recognises that it is important to expand greater voluntary adoption of IFRS in Japan. Accordingly, conditions for voluntary adoption of IFRS have been relaxed, and some other measures have been taken to make the dual reporting of IFRS in consolidated financial statements and Japanese GAAP in standalone financial statements less of a burden on preparers.

The ruling Liberal Democratic Party (LDP) has also taken action. The LDP issued a ‘Statement on Approach to IFRS’ (the Statement) in June 2013. In contrast to the Policy issued by the BAC, the Statement puts more emphasis on preparation for the future adoption of IFRS. The Statement highlights key points to expand greater voluntary adoption of IFRS in Japan, setting a target of approximately 300 companies applying or in the process of applying IFRS by the end of 2016. It also reaffirms Japan’s commitment to a single set of high-quality global standards.

All IFRSs issued by the IASB are the basis of voluntary adoption of IFRS in Japan, but a further endorsement mechanism was put in place in 2015. It is contemplated that under this endorsement mechanism, each IFRS would be reviewed and amended only after careful consideration of situations specific to Japan. However, the endorsement mechanism has been used to introduce a ‘carved-out version’ of IFRS to make transition to IFRS as issued by the IASB easier for Japanese companies. In June 2015, Japan’s Modified International Standards (JMIS): Accounting Standards Comprising IFRSs and the ASBJ Modifications was issued by the Accounting Standards Board of Japan (ASBJ). JMIS may be adopted in annual periods ending on or after 31 March 2016. JMIS differs from IFRS in that it requires goodwill to be amortised and it requires all items recorded in other comprehensive income be recycled to profit or loss eventually. At the time of writing, no Japanese companies have announced plans to apply JMIS. It should be noted that introducing JMIS would not prohibit companies from using IFRS as issued by the IASB if they so elect.

Following all of the above actions, the number of the companies voluntarily adopting IFRS in Japan has increased to approximately 60, mostly larger, companies. Although that number seems low, these companies represent a significant and growing part of the market capitalisation of the Tokyo Stock Exchange.

4.4.3 India

Accounting standards in India are issued by the Institute of Chartered Accountants of India (ICAI) and are ‘notified’ by the Ministry of Corporate Affairs (MCA) under the Companies Act. Currently, all companies registered under the Companies Act are required to follow Indian GAAP standards, which are based on old versions of IFRS and contain many key differences from IFRS.

In February 2015, the MCA notified the Companies (Indian Accounting Standards) Rules, 2015⁶³ laying down the roadmap for application of IFRS converged standards, known as Indian Accounting